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Petrobras Emerges from Shadow of Corruption

09/30/2016 - 13h10



The arrest last week of Guido Mantega, Brazil's longest-serving finance minister, would have been unthinkable only a few years ago.

Just as his wife was about to undergo surgery at a São Paulo hospital, police carted off Mr Mantega to answer questions about his alleged role in the vast corruption scandal at Petrobras, the state-controlled energy company that he was chairman of between 2010 and 2015.

Mr Mantega, who was finance minister between 2006 and 2014, has denied wrongdoing.

The investigation into corruption at Petrobras - prosecutors allege former directors conspired with politicians and contractors to loot an estimated R$42bn ($13bn) from the company - promises to draw a line under a damaging period of state interference in the oil producer.

Since Brazil's congress opened impeachment proceedings against Dilma Rousseff at the beginning of December, Petrobras's shares have soared more than 70 per cent.

Pedro Parente, who became Petrobras's chief executive in June, is now starting to reduce the vast debt load. With gross borrowings of $124bn, Petrobras ranks as the world's most heavily indebted listed energy company.

In his first five-year plan for the company released last week, Mr Parente set out an ambitious deleveraging timetable that analysts hope will prove to be a turning point for Petrobras's finances.

Mr Parente, who won respect as former head of agricultural trader Bunge, promised to reduce Petrobras's net debt from 5.3 times earnings before interest, tax, depreciation and amortisation last year to 2.5 times in 2018.

Part of this debt reduction strategy involves cutting Petrobras's investments between 2017 and 2021 to $74.1bn - a fall of 25 per cent compared with the company's previous forecast.

Mr Parente is also seeking to introduce transparent fuel pricing rules, ending one of the most contentious and damaging practices at Petrobras.

Analysts say Mr Mantega's greatest error was forcing the company to, in effect, subsidise domestic fuel prices, as part of the government's efforts to control inflation.

Between 2011 and 2014, the government, which directly and indirectly controls about 61 per cent of Petrobras's voting shares, required the company to import petrol and diesel and sell it at a loss in the domestic market.

Mr Parente has promised a "business-orientated policy for fuel prices" and is expected to announce a methodology whereby diesel and petrol prices would be adjusted, based on international oil and currency movements.

"The big discussion is about periodicity - whether prices would be adjusted every two, three or four months," says Celson Plácido, a strategist at XP Investimentos. "The market believes in Parente - he has credibility because of his management history."

Less state interference will also allow Petrobras to downsize, creating opportunities for overseas companies to acquire assets focused on ethanol, fertiliser, petrochemicals, which the oil producer intends to sell.

After disposing of $15.1bn of assets during 2015 and 2016, including one of its largest offshore oil licences to Norway's Statoil for $2.5bn in July, Petrobras proposes to make divestments worth $19.5bn during 2017 and 2018. Its petrol station chain BR Distribuidora is one of the most coveted assets up for sale.

"This rebalancing of priorities is likely to create more opportunities for international oil companies and other investors in Brazil's energy sector," says João Augusto de Castro Neves of Eurasia Group, a risk consultancy.

Petrobras is also set to benefit from legislative changes under President Michel Temer's more business-friendly government.

Next month the lower house of congress is expected to approve legislation that would relieve Petrobras of its obligation to be lead operator in Brazil's deepwater "pre-salt" oil and gasfields, a move that could allow the company to curb its investments.

However, risks remain. Low oil prices have reduced interest from overseas companies in Brazil's pre-salt fields and Petrobras's assets, while battles with trade unions about wages and a US class action lawsuit over corruption could derail Mr Parente's five-year plan.

"Petrobras' new business plan is challenging," says Nymia Almeida, analyst at Moody's. "The company's success in achieving its ultimate deleveraging goal, which would be positive for its credit profile, will depend on extreme managerial focus and discipline."

Copyright The Financial Times Limited 2016

(c) 2016 The Financial Times Limited

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